Question

In: Finance

Marco Chip, Inc. just issued zero-coupon bonds with a par value of $1,000. The bond has...

Marco Chip, Inc. just issued zero-coupon bonds with a par value of $1,000. The bond has a maturity of 9 years and a yield to maturity of 7.01 percent, compounded semi-annually. What is the current price of the bond?

Please show the work as you'd enter it into excel/what formula is used/etc.

Solutions

Expert Solution

CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY
Step 1 : Calculation of Annual Coupon Payments
Par value of the bond issued is   = $1,000
Annual Coupon % 0.00%
Annual Coupon Amount $0.00
Semi Annual Coupon Amount $0.00
Step 2: Calculate number of years to Maturity
Number of years to maturity = 9 years
Interest is paid semi annyally so total period = 09*2 = 18
Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
Market rate of interest or Yield to Maturity or Required Return = 7.01%
Bonds interest is paid semi annualy means so discounting factor = 7.01 % /2= 3.505%
PVF = 1 / Discount rate = 1/ 1.03505
Result of above will again divide by 1.03505 , repeated this upto last period
Period PVF @ 3.505%
1                        0.9661
2                        0.9334
3                        0.9018
4                        0.8713
5                        0.8418
6                        0.8133
7                        0.7857
8                        0.7591
9                        0.7334
10                        0.7086
11                        0.6846
12                        0.6614
13                        0.6390
14                        0.6174
15                        0.5965
16                        0.5763
17                        0.5567
18                        0.5379
So Present value of the $ 1 at the end of Period 18th = 0.5379
Present value of the Bonds = $ 1000 X 0.5379
Present value of the Bonds = $537.89
Answer = Present Value of the Bonds = $ 537.89

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